âThe playoffs for the race to the Stanley Cup are on â and Vancouver has a team in the running. They are carrying longer odds than the chances the Polish zloty will become the worldâs reserve currency!â

Tom Crone; a friend from Vancouver who loves his hockey and trading

FX Trading â Fill those risk appetites

Based on the G-7 meeting this weekend, it continues to be âall goodâ out there. A wink and nod was given to the global imbalance theme. And yes, the Chinese currencyâs persistence âundervaluationâ has become seeming boilerplate on the agenda. But, overall, the message was clear sailing ahead. Keep on doing what youâre doing and donât worry.

âSince 2003, being blasĂŠ has been the most profitable strategy. Risky assets have performed well; for example, the spreads on emerging-market debt recently hit an all-time low. Market shocks have been subdued. Even February 27th's 400-point fall in the Dow Jones Industrial Average came low down the historical league table of percentage daily falls.

âBut what might cause risk appetite to change and volatility to soar? The simple answer is Harold Macmillan's phrase, âEvents, dear boy, eventsâ, perhaps some geopolitical incident or unexpected corporate failure. Emerging-market debt would be a big casualty of such a shift. The IMF reckons that, if volatility moved to two standard deviations above its post-1990 average, emerging-market debt spreads would more than double. Something to worry about indeed.â

The yen made a fresh all-time high against the euro today. And as we know, the yen has become the poster child for global growth, low volatility, and plenty of liquidity:

USDJPY Daily Chart (H&S)

We noticed a very informative Letter to the Editor recently in the Financial Times, penned by Lombard Street Research in response to an article earlier in the week suggesting rates in Japan must stay low, lest deflation rear its ugly head there [the premise behind the yen carry trade argument]. The analysts from Lombard argue low rates have hurt the Japanese consumer. And interest rates wonât hurt capital spending. Here is an excerpt:

âNormalizing interest rates from Â˝ per cent to 3 per cent could add some 3 per cent to consumer spending and 2 per cent to GDP. This would not dent capital investment; rather the reverse. The yen would appreciate massively, but the damage to net exports could and should be offset by a tax cut; last yearâs public spending fell 2 per cent while tax yield rose 8 per cent. Domestic demand would take over from export-led growth, so the budget deficit would shrink.â

âThe deflationary risk lies in keeping rates artificially low while the structural budget deficit is too aggressively addressed. The authorities would boost the economy by aggressively raising ratesâand do the world a favour in the process.â

Hmmm! It seems to make sense. It could be reason why US Treasury Secretary Paulson and the rest of the G-7 donât seem too concerned about the yen.

Jack Crooks

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